Tax Benefits of Charitable Easements

Alloy Silverstein’s Tax Tip of the Week

Do you own real estate property far from the suburban sprawl? If you donate a part of the property as a “conservation easement” to a qualified charity you can realize a big tax deduction without relinquishing ownership of the property.

“The easement may consist of an owner’s entire interest in the property other than qualified mineral interest, a partial interest in the property, or a permanent restriction on the property,” advises associate partner Ren Cicalese III, CPA, MST.

Depending on the nature of the easement, you might endure only minor intrusions or inconveniences as a result of your donation.

The IRS allows a deduction for conservation purposes in four specific situations:

1. Protection of natural habitats for fish, wildlife or plants. Access by the public may be limited for environmental reasons.
2. Preservation of land for public recreational or educational use. This category includes property used for fishing, boating or a nature or hiking trail. Public use of the property must be “substantial and regular.”
3. Preservation of certified historic structures. In this case, some public access is required.
4. Preservation of “open space,” for the enjoyment of the public. This may be a scenic overlook of your property, rather than a walkway through it. In other words, you may not even have any visitors on your land, eliminating concerns about littering or loud noise.

Eligible Tax Breaks

Donors may also benefit from a couple of tax breaks recently made permanent by tax legislation. Normally, charitable deductions for donations of property are limited to 30 percent of your adjusted gross income (AGI), with any excess being carried over for up to five years. But the 30 percent of AGI limit has been raised to 50 percent for conservation easements (100 percent for farmers and ranchers), while the carryover period is extended to 15 years.

Easement Obstacles

Anticipate having the property appraised. “The IRS will ask you for an appraisal of the property to substantiate the deduction. If you don’t have a qualified appraisal, you are likely to have the deduction denied,” adds Ren.

There is one catch. If you donate a conservation easement to charity, it must be made “in perpetuity.” This means that your heirs or any succeeding owners can’t develop the land for other uses, such as a golf course or ski lodge. This restriction lasts forever, so weigh your options carefully if you are considering a charitable easement.

You also should be prepared if the property has historical restrictions attached to it. Per Ren, “Historic easements are often a problem area. If an easement is granted where it is agreed that a historic building will not be modified, the charitable deduction would only be valid if the property was not subject to local zoning ordinances. If local law already prohibited modification the owners of the building would not be considered as giving up a right they do not have, and the deduction would be denied.”

Feel good about giving back, making moves towards sustainability, and having tax benefits in your favor. Turn to your CPA for guidance on eligible tax deductions and breaks.
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